2.12 Tax Credits

Child Tax Credit

The Child Tax Credit (CTC) is a partially refundable tax credit, reported on Schedule 8812- Credits for Qualifying Children and Other Dependents and carried to Form 1040, available to taxpayers with dependent children under the age of 17. The credit can reduce the tax bill on a dollar-for-dollar basis, potentially eliminating the tax bill altogether.

To receive the CTC, a taxpayer must include an SSN for each qualifying child for whom the credit is claimed. A qualifying child is an individual who has not attained age 17 during the taxable year. A child who is not a citizen, national, or resident of the US cannot be a qualifying child.

For taxable years beginning in 2026, the maximum Child Tax Credit is $2,200 per qualifying child under age 17. This increase was made permanent under the OBBBA, and the credit will continue to be adjusted for inflation going forward, so this is no longer a number that resets or expires.

The refundable portion, commonly referred to as the Additional Child Tax Credit, remains at $1,700 for 2026. This is the portion that can come back to the taxpayer as a refund even when the credit exceeds their tax liability.

The credit begins to phase out when modified adjusted gross income exceeds $400,000 for married filing jointly or $200,000 for all other filers. For every $1,000 of income above those thresholds, the credit is reduced by $50. Taxpayers whose income significantly exceeds these limits may receive a reduced credit or none at all depending on how far above the threshold they fall.

A growing number of states across the US have created their own child tax credits, supplementing the federal Child Tax Credit and providing direct financial relief to families. These credits are separate from and in addition to the federal credit, and in some cases, they are structured more generously, particularly for lower-income families.

As of 2026, more than a dozen states offer some form of a child tax credit, including Arizona, California, Colorado, Georgia, Idaho, Illinois, Maine, Maryland, Massachusetts, Minnesota, New Jersey, New Mexico, New York, Oklahoma, Oregon, Utah, Vermont, and the District of Columbia.

The structure varies significantly from state to state. Some are a flat dollar amount per child, others are a percentage of the federal credit, and some are means-tested with phase-ins or phaseouts based on income. Several states have made their credits fully refundable, meaning families with little or no state tax liability can still receive the full benefit.

Earned Income Credit

The Earned Income Credit is a refundable tax credit, claimed on Schedule EIC, designed to assist low- to moderate-income workers and families. The credit amount varies based on earned income, filing status, and number of qualifying children. Taxpayers without children may still qualify for a reduced credit if they meet the income requirements. One requirement that never changes: one must have earned income during the tax year for which taxpayer is claiming the credit.

2026 Earned Income Credit

A few things worth knowing about how this table works. The earned income amount is the point at which the maximum credit is reached. The phaseout begin amounts represent where the credit starts to reduce based on adjusted gross income or earned income, whichever is greater. The phaseout end amounts are where the credit reaches zero and no credit is allowed.

Married taxpayers who are not filing jointly but meet the special rules for separated spouses under § 32(d) use the “all other filing statuses” phaseout amounts, not the married filing jointly amounts.

For 2026, the EIC is not allowed if a taxpayer’s aggregate investment income exceeds $12,200. This is an increase from $11,950 in 2025. Investment income for this purpose includes taxable interest, dividends, capital gains, and certain passive income. This limit catches some taxpayers off guard, particularly those who have modest wages but also hold investments that generate income. If a client’s investment income pushes past this threshold, they lose the credit entirely regardless of their earned income or family size.

Taxpayers must meet the following basic criteria:

• Be a US citizen or resident alien all year
• Not file Form 2555, Foreign Earned Income
• Must have a valid Social Security number

Schedule EIC is attached to Form 1040 or Form 1040-SR when a taxpayer is claiming the Earned Income Credit with one or more qualifying children.

For each qualifying child (up to three), Schedule EIC collects the child’s name, SSN, year of birth, relationship to the taxpayer, and number of months the child lived with the taxpayer in the United States during the year. The IRS uses this information to verify that each child meets the relationship, age, and residency tests required for the credit.

A valid Social Security number is required for each qualifying child listed on Schedule EIC, an ITIN does not qualify.

More than 30 states, plus the District of Columbia and Puerto Rico, currently offer a state or local earned income tax credit (EITC) in addition to the federal credit. Several states also extend eligibility for their state EITCs to certain taxpayers filing with Individual Taxpayer Identification Numbers (ITINs), including California, Colorado, Illinois, Maine, Maryland, Minnesota, New Mexico, Oregon, Vermont, Washington, and the District of Columbia. However, the federal EITC still requires valid Social Security numbers for the taxpayer, spouse, and qualifying children. To see a full list of states offering the Earned Income Credit click here.

Credits for Qualifying Children and Other Dependents

For taxpayers who have dependents who do not qualify for the Child Tax Credit, the Credit for Other Dependents (ODC) may provide some relief. This is a non-refundable credit, meaning it can reduce a tax liability dollar for dollar all the way to zero, but any excess beyond what the taxpayer owes is not refunded.

The ODC was created by the Tax Cuts and Jobs Act of 2017 with a scheduled expiration of December 31, 2025. The OBBBA permanently extended the credit, so it remains in effect for 2026 and beyond. The maximum credit remains $500 per qualifying dependent.

The ODC can be claimed for dependents of any age, including those 18 and older, as long as the taxpayer cannot claim the Child Tax Credit or Additional Child Tax Credit for that person. This includes:

• Dependent children aged 17 and older.
• Dependent parents or other qualifying relatives the taxpayer supports.
• Any other individual who qualifies as the taxpayer’s dependent, including those who are not related to the taxpayer but live in the household.

The credit begins to phase out when AGI exceeds $200,000 (all filers) or $400,000 (married filing jointly). For every $1,000 of income above those thresholds, the credit is reduced by $50.

The ODC is calculated on Schedule 8812, Credits for Qualifying Children and Other Dependents.

A handful of states have their own dependent care or family credit structures that may apply to dependents not eligible for the state child tax credit. These vary significantly, some states mirror the federal ODC, others fold dependent relief into a broader household credit. Tax professionals should always check the applicable state return for credit opportunities that go beyond the child-specific credits, particularly for taxpayers supporting elderly parents or adult disabled dependents.

Child and Dependent Care Expenses

The Child and Dependent Care Credit help working taxpayers offset the cost of care for a qualifying person so they can work or look for work.

A taxpayer may claim this credit if they paid someone to care for a qualifying person and that care enabled the taxpayer (and spouse, if filing jointly) to work or actively look for work. A qualifying person is:

• A dependent child under age 13
• A spouse of any age who is physically or mentally incapable of self-care and lived with the taxpayer for more than half the year
• Any other dependent of any age who is incapable of self-care and has lived with the taxpayer for more than half the year

To claim the credit, the taxpayer must meet all of the following:

• Filing status must be single, head of household, qualifying surviving spouse, or married filing jointly. MFS filers are generally disqualified unless the lived-apart exception applies.
• The taxpayer (and spouse if married) must have earned income during the year. A spouse who is a full-time student or is incapable of self-care is treated as having earned income of $250/month (one qualifying person) or $500/month (two or more qualifying persons) for purposes of this rule.
• Payments cannot be made to a spouse, to the child’s parent (if the qualifying person is the taxpayer’s child under 13), to a dependent of the taxpayer, or to the taxpayer’s own child under age 19.
• The taxpayer must identify the care provider on the return: name, address, and taxpayer identification number.

The maximum expenses that can be used to calculate the credit are:

• $3,000 for one qualifying person
• $6,000 for two or more qualifying persons

Prior to the OBBBA, the credit was worth 20% to 35% of qualifying expenses depending on income, with the maximum rate available only to taxpayers with AGI of $15,000 or less. The OBBBA permanently increased the maximum rate to 50% and restructured the phaseout as follows:

Under this new structure, the maximum possible credit is:

• $1,500 for one qualifying person (50% × $3,000)
• $3,000 for two or more qualifying persons (50% × $6,000)

The credit does not drop below 20% regardless of income level, so higher-income taxpayers still receive some benefit.

For single filers, the credit percentage is 50% for AGI up to $15,000, phases down gradually to 35% between $15,000 and $45,000, remains at 35% between $45,000 and $75,000, phases down again from 35% to 20% between $75,000 and $105,000, and reaches the 20% floor for AGI above $105,000.

For married filing jointly, the credit percentage is 50% for AGI up to $15,000, phases down gradually to 35% between $15,000 and $45,000, remains at 35% between $45,000 and $150,000, phases down again from 35% to 20% between $150,000 and $210,000, and reaches the 20% floor for AGI above $210,000.

The 20% minimum rate applies at AGI above $105,000 for single filers and $210,000 for married couples filing jointly. This means even higher income taxpayers retain some benefit from the credit, though at the minimum rate.

This credit is nonrefundable. Taxpayers with little or no federal tax liability may not receive the full benefit even if they qualify, because the credit cannot exceed the tax owed. This is an important planning point, taxpayers who rely heavily on refundable credits should understand that the Child and Dependent Care Credit will only help to the extent they have a tax bill to offset.

The Child and Dependent Care Credit is calculated on Form 2441, Child and Dependent Care Expenses, which is attached to Form 1040. The form requires the care provider’s name, address, and TIN.

Important: If the taxpayer’s employer provides dependent care benefits through a Flexible Spending Account (FSA) or other dependent care benefit plan, those excluded amounts reduce the qualifying expense base dollar for dollar. For example, if a taxpayer excludes $5,000 in employer-provided FSA benefits and has $6,000 in actual care expenses, only $1,000 is available for the credit calculation. This is one of the most frequently misunderstood interactions in this area.

Many states offer their own version of the child and dependent care credit. States including Arkansas, California, Colorado, Connecticut, Delaware, Hawaii, Idaho, Indiana, Iowa, Kansas, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Montana, Nebraska, New Jersey, New Mexico, New York, Ohio, Oklahoma, Oregon, Rhode Island, South Carolina, Vermont, Virginia, Wisconsin, and the District of Columbia. These credits vary widely by state, with some calculated as a percentage of the federal Child and Dependent Care Credit, others offering flat-dollar credits, and many providing refundable benefits aimed at lower- and middle-income households. Several states have expanded or enhanced these credits in recent years as childcare affordability has become a growing policy focus.

Education Credits

Two federal tax credits are available to taxpayers who pay qualified higher education expenses: the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). Both are calculated and claimed on Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits). Taxpayers must complete a separate Part III for each student before completing Part I or Part II.

To claim either credit, all of the following must be true:

• The taxpayer, their dependent, or a third party pays qualified education expenses for higher education
• The student is enrolled at an eligible educational institution
• The student is the taxpayer, their spouse, or a dependent listed on their return

Neither credit can be claimed if:

• The taxpayer’s filing status is married filing separately
• The student is claimed as a dependent on another person’s return
• MAGI exceeds the phaseout threshold (see each credit below)
• The taxpayer or spouse is a nonresident alien for any part of the year and did not elect resident alien treatment
• Another education credit is claimed for the same student in the same tax year

Beginning with the 2026 tax year, both the AOTC and the LLC require a valid Social Security number, not just any taxpayer identification number. The taxpayer must include their own SSN on the return. If the credit is claimed for a dependent student, that student’s SSN must also be provided. For married couples filing jointly, both spouses’ SSNs are required. Taxpayers with ITINs who previously qualified may no longer be eligible. This is a new compliance point that preparers need to verify at intake.

Qualified expenses include tuition and required enrollment fees, and amounts paid to the institution for course-related books, supplies, and equipment. They do not include room and board, insurance, medical expenses, transportation, personal expenses, sports or hobby courses (unless required for a degree program), or non-academic fees such as student activity fees or athletic fees.

Qualified expenses must be reduced by any tax-free educational assistance received, scholarships, grants, employer-provided tuition assistance, and similar items. The resulting figure is the adjusted qualified education expense used to calculate the credit.

Form 1098-T is issued by eligible educational institutions to students who paid qualified tuition and related expenses during the tax year. Schools are required to furnish this form by January 31.

Box 1 of the form reports the total amount of payments received by the institution for qualified tuition and related expenses. Box 5 reports scholarships or grants received. Box 7 indicates whether any amounts include charges for the next academic period, and Box 8 confirms at least half-time enrollment status. Taxpayers must reduce their qualified expenses by any scholarships or grants shown in Box 5 to arrive at the adjusted qualified education expenses used to calculate the AOTC or LLC on Form 8863.

One important note: the amount in Box 1 is what the school received, it may not match what the taxpayer actually paid or can claim. Preparers should verify actual payments against the 1098-T rather than accepting the box amount at face value.

American Opportunity Tax Credit (AOTC)

The AOTC covers qualified education expenses for a student’s undergraduate years. It is the more valuable of the two education credits and is the one most families with traditional college-age students will claim.

Maximum credit: $2,500 per eligible student per year

The credit is calculated as 100% of the first $2,000 in qualified expenses, plus 25% of the next $2,000, for a maximum of $2,500 per student.

Up to 40% of the credit is refundable, meaning that if the credit reduces the taxpayer’s liability to zero, up to $1,000 can be refunded. This makes the AOTC one of the few education benefits that can actually generate a refund.

To qualify, the student must:

• Be pursuing a degree or other recognized education credential
• Be enrolled at least half-time for at least one academic period during the tax year
• Not have completed the first four years of higher education before the beginning of the tax year
• Not have claimed the AOTC (or the former Hope Credit) for more than four tax years, these years do not need to be consecutive
• Not have a felony drug conviction at the end of the tax year

Phaseout (2026, unchanged from prior years; not indexed for inflation)

Note: These thresholds have not changed and are not adjusted for inflation. Families hovering near the upper limits should be aware that even a modest income increase can eliminate eligibility entirely.

When claiming the AOTC on Form 8863, the preparer must now include the educational institution’s Employer Identification Number (EIN). This information appears on Form 1098-T.

Lifetime Learning Credit (LLC)

The LLC is a nonrefundable credit designed for a broader range of educational situations. It has no limit on the number of years it can be claimed, making it the go-to credit for graduate students, working professionals taking job-skill courses, and students who have already exhausted their AOTC eligibility.

Maximum credit: $2,000 per return (not per student)

The credit equals 20% of the first $10,000 in qualified expenses, capped at $2,000 regardless of how many students are in the household. This is a critical distinction from the AOTC, which is calculated per student.

This credit is nonrefundable. It can reduce tax liability to zero but will not generate a refund.

To qualify, the student must:

• Be enrolled at or taking courses at an eligible educational institution.
• Be taking higher education courses toward a degree or recognized credential, or to acquire or improve job skills.
• Be enrolled for at least one academic period beginning in the tax year.

Unlike the AOTC, the LLC does not require half-time enrollment, does not have a year limit, does not require the student to be working toward a degree (job-skills courses qualify), and has no drug conviction restriction.

Phaseout (2026, unchanged; not indexed for inflation)

Key rule: Cannot claim both credits for the same student in the same year. However, taxpayer can claim the AOTC for one student and the LLC for a different student on the same return.

Only a few states offer their own education credits or deductions that work alongside (not instead of) the federal credits. These vary significantly by state and are claimed on the state return separately:

• Several states, including Illinois, Indiana, Louisiana, and Minnesota, offer credits or deductions for K–12 and higher education tuition and fees.
• New York provides a College Tuition Credit (or deduction) for undergraduate tuition paid to an eligible institution, worth up to $400 per student as a credit or a deduction of up to $10,000.
• Iowa previously offered a tuition and textbook credit, and several states are actively expanding education-related credits as part of broader school choice legislation tied to OBBBA’s private school tax credit provisions.

Information To Claim Certain Credits After Disallowance

If any of the following credits were previously reduced or disallowed for a reason other than a math or clerical error, the taxpayer must complete and attach Form 8862, Information to Claim Certain Credits After Disallowance, before the IRS will allow the credit again:

• Earned Income Credit (EIC)
• Child Tax Credit (CTC), Additional Child Tax Credit (ACTC), or Credit for Other Dependents (ODC)
• American Opportunity Tax Credit (AOTC)

The form is attached directly to the tax return for the year the taxpayer is reclaiming the credit.

Form 8862 does not need to be filed if, after the credit was previously reduced or disallowed, the taxpayer filed Form 8862 (or other documentation), the credit was subsequently allowed, and the credit has not been disallowed again since. In other words, once the credit is reinstated, the taxpayer does not keep filing Form 8862 year after year, only if the IRS disallows it again for a non-math reason.

Also, a taxpayer claiming the EIC without a qualifying child does not need to file Form 8862 if the only reason the credit was previously reduced was that a child listed on Schedule EIC was determined not to be a qualifying child.

A standard disallowance, one that was not the result of reckless, intentional, or fraudulent conduct, requires Form 8862 to reclaim the credit in the first eligible year after the disallowance. But two more serious situations trigger ban periods:

• 2-year ban: Applies when there has been a final determination that the credit claim was due to reckless or intentional disregard of the rules. Filing Form 8862 during the ban period will not reinstate the credit.
• 10-year ban: Applies when there has been a final determination that the credit claim was due to fraud. Same result, the credit cannot be reinstated while the ban is active.

A taxpayer can request reconsideration of the ban by submitting documentation proving they were entitled to the credit for the year the ban was imposed, or documentation showing the claim was not due to reckless or intentional disregard of the rules (for the 2-year ban) or fraud (for the 10-year ban).